Updated: Dec. 10, 2018
Issue: In June of 2018, a new state law was enacted requiring TRS to offer all retiring Tier 1 members an “accelerated pension benefit payment” equal to a portion of their future pension benefit. In order to receive the accelerated payment, a retiring Tier 1 member must accept an irrevocable reduction in the automatic annual increase (AAI) that will apply to the remainder of their TRS pension.
Only retiring Tier 1 members are eligible for this voluntary program. The decision to participate in the program is irreversible and final. The alternative AAI and “accelerated pension benefit payment” program will exist until June 30, 2021.
While the law took effect on June 4, 2018, the General Assembly recognized that it will take time for TRS to put the IT systems and rules in place needed to implement the act. TRS must begin the program “as soon as practical,” but it will likely take months before it begins.
Discussion: When the program is implemented, TRS will ask every Tier 1 member when they fill out their retirement paperwork whether they want to participate. Members that choose to accept the program will:
- Renounce their rights to the current Tier 1 AAI – which is a 3 percent annual increase in their pension benefit that always is calculated from the amount of their current pension.
- Accept a new AAI – an annual 1.5 percent increase in their pension that always is calculated from the amount of their original pension.
- Receive a lump-sum “accelerated pension benefit payment” that equals 70 percent of the monetary difference between the estimated current lifetime value of the 3 percent Tier 1 AAI and the estimated current lifetime value of the 1.5 percent Tier 1 AAI.
For a retiring Tier 1 member participating in this program, the alternative AAI would take effect on the January 1 after the member turns 67 or the first anniversary of the member’s retirement, whichever is later. The existing Tier 1 AAI begins on the January 1 after the member turns 61 or the first anniversary of the member’s retirement, whichever is later.
Program participants cannot repay the “accelerated pension benefit payment” to TRS in order to reclaim the 3 percent AAI.
Members joining either program will be able to receive their “accelerated pension benefit payment” as cash or as a “rollover” into a private tax-qualified retirement plan. If a member takes the payment as cash, it will be subject to all applicable federal taxes and charges, as well as any involuntary garnishments by the state or federal government, such as unpaid student loans.
If a member retires, accepts the alternative AAI and then returns to active service, the member’s AAI will be 1.5 percent if they retire again. The selection of the alternative AAI by a retiring member also automatically reduces the annual increases in any survivor benefit due to beneficiaries when the member dies.